The securitization of mortgages
Each bank, when granting a loan, bear risk: the one who turns on the loan may not pay and lose a lot of money to the bank.
Getting a loan is not easy: to be given to all bank guarantees and a financial history of all respect (results not to be insolvent, protests, have a job).
At this point, the bank may choose to grant the loan (and bear the related risks) or funded outside (and transfer to other risks of the loans themselves).
How does the second alternative?
If we decide to buy a house, the bank pays the full amount for us and we must repay the debt with interest. The bank then subjected to a risk (that the customer does not pay the installments of the loan) that the mortgage on the house or the property taken by the customer.
But the bank, to protect them, can do more. For example, may take a certain set of loan contracts, 100 contracts from 100 thousand Euros each, for a sum that is worth 10 million Euros. In view of these mortgage contracts, may issue bonds worth 10 million Euros, of which periodic payments of interest and the final repayment of the sums will be guaranteed by periodic payments of installments of loans.
In this way, the bank obtained before the expiration of the 100 loan contracts, the sum which has already paid to customers, but reduced the sum of interest payments on debt.
This is the securitization, which means that processing into folders in bonds.